Mandrake, Inc. has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000. Based only on this information, compute Mandrake's taxable income.

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Quizplus · Accepted Answer

For tax purposes, the IRS does not allow companies to deduct bad debt expenses determined by the allowance method. Instead, actual write-offs are deductible. Therefore, to compute taxable income, we start with the book income of $569,300 and adjust for the difference between the bad debt expense reported ($50,700) and the actual write-offs ($48,000). This difference is $2,700 ($50,700 - $48,000), which was deducted in arriving at book income but is not deductible for tax purposes. Adding this back to the book income gives us $569,300 + $2,700 = $572,000.